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Implications For UK PLC Of Falling Corporate Tax Rates

Progressive cuts in UK corporate tax rates, designed to boost domestic business growth and inward investment by overseas companies, have now created a yawning gap between Britain and other major Western economies. What are the implications?

It’s difficult to imagine but, up until the aggressive tax cutting by Margaret Thatcher’s chancellors in the 1980s, the headline rate of corporate tax was 52% and the small companies’ rate was 42%. Contrast that with today’s corporate tax environment and you can see why the UK is gradually morphing into a bit of a tax haven – at least as far as major companies are concerned. As from the financial year started April 1st 2014, the UK’s main corporate tax rate is now a lowly 21% while the small companies’ rate is a mere 20%.

Progressive cuts in UK corporate tax rates, designed to boost domestic business growth and inward investment by overseas companies, have now created a yawning gap between Britain and other major Western economies with headline corporate tax rates in the US of 40%, in Germany of 30% and in France 33%.

Given this situation it is not surprising that large global players, especially those based in America, are casting envious eyes towards Britain and contemplating how they can take advantage of this growing disparity in corporate tax rates. The most famous firm to have taken action so far was Viagra maker, Pfizer, who this May launched an audacious bid to acquire the UK drug company, Astra Zeneca, in an eye-watering £69 billion deal.

The US pharmaceutical giant had amassed multi-million dollar profits and cash reserves from all of its operations outside of North America and its problem was that, if it remunerated part or all of these to the US, it would immediately be presented with an onerous tax bill from Uncle Sam. The answer, Pfizer’s board decided, was to invest these reserves in a large complimentary business operating in a low tax environment and possibly even to move the entire merged company’s tax domicile to that environment.

Well, as it turned out, Astra Zeneca rebuffed all Pfizer’s approaches and saved the UK government from possibly having to block the acquisition on the grounds that it threatened the country’s life sciences knowledge base.

However, it seems that Pfizer was only the advanced guard of what appears to be a column of large US multinationals queuing to adopt similar tactics in the hopes of benefitting from the UK’s low corporate tax rates. Barely was the ink dry on Astra Zeneca’s final refusal to give up its independence when a fellow UK pharma, Shire, received an unsolicited £27 billion approach from another US predator, AbbVie.

Although Shire is a substantial player, its science base is not quite so essential to the UK’s national interest as Astra Zeneca and it may yet still succumb to the right offer.

This looks very much as though we may be witnessing the start of a trend here and one wonders whether this was quite the sort of inward investment that successive British chancellors had in mind when they first began their assault on UK corporate tax levels.

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